13. Next year, AG-Electronics Corp (AGEC) expects earnings per share of $8 and plans to pay...

 

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13. Next year, AG-Electronics Corp (AGEC) expects earnings per share of $8 and plans to pay a dividend of $6 per share. The dividends of this company are expected to grow at a rate of g = 4% in the foreseeable future. AGEC's operations are financed only by equity and its price per share is currently $60. (a) What is the cost of equity rg of this firm? Show your work. (b) What is the expected capital gain rate of AGEC stock? Show your work. (c) Suppose that AGEC has a new investment opportunity that is expected to have a return of 11%. In order to undertake this project, the company would like to reduce its dividend pay-out rate to 50%. What would be the new price per share if it undertook this investment? Show your work. Would you recommend that AGEC undertake this investment? Explain why or why not. Use the dividend discount model of valuation. 13. Next year, AG-Electronics Corp (AGEC) expects earnings per share of $8 and plans to pay a dividend of $6 per share. The dividends of this company are expected to grow at a rate of g = 4% in the foreseeable future. AGEC's operations are financed only by equity and its price per share is currently $60. (a) What is the cost of equity rg of this firm? Show your work. (b) What is the expected capital gain rate of AGEC stock? Show your work. (c) Suppose that AGEC has a new investment opportunity that is expected to have a return of 11%. In order to undertake this project, the company would like to reduce its dividend pay-out rate to 50%. What would be the new price per share if it undertook this investment? Show your work. Would you recommend that AGEC undertake this investment? Explain why or why not. Use the dividend discount model of valuation.

Answer rating: 100% (QA)

SOLUTION a The cost of equity rE can be calculated using the dividend discount model DDM which assum... View the full answer